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Gaming changes soften casino-hotel values

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April 12, 2013

Gaming changes soften casino-hotel values

REPORT FROM THE U.S.?Industry insiders say the recent sale of the Trump Plaza Atlantic City casino hotel for the price of $20 million and the massive Revel resort?s recent bankruptcy filing reflects not just the ailing overall health of the New Jersey city but also underscores current trends in casino-hotel valuation nationwide. Aside from Las Vegas?which firmly dominates the gaming destination market?the hotels in most casinos are still considered an amenity, only worth as much as the gaming operation attached to it.

With local casinos popping up all over the Eastern Seaboard for day-trippers (like the sprawling Native American-owned Mohegan Sun in Connecticut), Atlantic City?s casino-hotels are courting less long-haul demand, putting declining importance on hotel facilities. Sources said this is typical with most markets outside Las Vegas, which is the only gaming destination where non-gaming revenue makes a noticeable contribution to the balance sheet.

?The non-gaming revenue in Vegas has now approached or exceeded 50% of the total revenue coming out of most of the casinos there. So non-gaming has become more than just an amenity?it?s become a real revenue driver and a profit driver for the Vegas casinos,? said Michael Register, VP of development for Trust Hospitality, which has operated multiple Atlantic City properties in the past and will manage a new 4-star Hemingway casino-hotel planned for Gulfport, Mississippi. ?But in places like Atlantic City, everything?s still pretty much about the casino. Everything?s done to drive more gaming revenue.?

Better days behind

Driving gaming revenue in Atlantic City has become a considerable problem, though. Sources indicated that aside from the massive Borgata Hotel Casino & Spa complex there, many of the older, outdated casino-hotels on the boardwalk continue to slip into irrelevance, driven by both their current lackluster condition?with many requiring expensive updates?and broader factors, such as New Jersey?s less-than ideal climate and the proliferation of competing casinos in the region.

?Atlantic City has been subjected to intense competitive pressures from all the mid-Atlantic states, which has gotten more and more intense over time,? said Suzanne Mellen, senior managing director of HVS San Francisco. ?Atlantic City is becoming more and more of a locally oriented casino market, because if you want to go gaming, most of the mid-Atlantic states all have their own gaming facilities. It?s just basically sucking demand out of Atlantic City, which impacts income, which impacts revenue, which impacts value.?

And the fallout is making itself known, especially among the lesser-performing properties: In February, the Trump Plaza in Atlantic City sold for $20 million?the lowest price ever paid for an Atlantic City casino-hotel?to the Meruelo Group of Downey, California, following a pattern of similar sales in Atlantic City, most notably the $31.5-million purchase of the Resorts Casino Hotel in December 2010 and the Trump Marina Hotel Casino, which fetched $38 million in May 2011 (and later became the Golden Nugget).

Carl Icahn bought the bankrupt Tropicana Casino and Resort for $200 million, which once listed at $1 billion, while the Atlantic City Club Casino Hotel is currently being hawked for what is expected to be a fraction of the $513 million its present owners paid in 2005.

?A lot of the casinos that have sold recently are really the lowest-performing casinos there ? a lot of the lower-tier properties,? said Emily Sze, assistant VP with the HVS Gaming Division in Las Vegas. ?Trump Plaza is considered one of the smaller properties. It has a great central location on the boardwalk, but it?s an older property with some deferred maintenance.?

But even the top-tier products are struggling. While the Borgata, built in 2003, is considered a relative success?doubly surprising since it?s removed from the oceanfront?the $2.4-billion Revel resort that opened last year filed for structured bankruptcy reorganization. Its former CEO Kevin DeSanctis resigned last month, just weeks before the filing. Company representatives, when contacted for this story, remained optimistic.

?By right-sizing our balance sheet through the restructuring process, Revel will be on a firmer financial footing, with improved cash flow to better support our operations,? said Jeff Hartmann, interim CEO. ?Ultimately, this will not only position Revel for success but will be a positive step for Atlantic City as a whole.?

No easy solution

Reversing the trend in Atlantic City?s casino-hotel performance?and resulting valuations?is an uphill battle, especially considering all the competitive pressures Atlantic City is facing. While Revel and Borgata may have the advantage of size and relative newness, many of the boardwalk?s other properties need to be made over to return to past glory.

?If Atlantic City really wants to survive and put itself back on the map, it needs to reinvent itself as a destination, and to do that you?d have to have bigger casinos and offer all the things that Las Vegas offers. But who?s going to want to make that investment? And why are people going to want to go there, when there are new facilities being built in all those surrounding states?? Mellen said. ?I can?t see that happening.?

As for the future performance of the hotel portion of these casino-hotel properties, rooms revenue is expected to remain minimal, especially with the high volume of comped and discounted rooms offered by the casinos themselves. Market-wide occupancy is inflated in Atlantic City at the moment?since many rooms are provided as comps?and average rate is equally devoid of any tangible market-driven impact.

?The casino is actually paying for their customers to stay in their rooms. If you look at the average occupancy in Atlantic City, it?s still pretty high and that?s because they?re filling it up with casino guests that they?re bringing in at discounted or comped rates,? Mellen said. ?If you had just that hotel there and didn?t have any gamers, it would be a vastly different story?you?d have much lower occupancy and who knows about the rate because it?s an artificial rate.?

The same thinking applies to new projects in the nationwide pipeline. Register says that even in Mississippi, where warmer weather, white sand beaches and fishing help draw tourists for non-gambling pursuits, gaming revenues at casino-hotels still outweigh non-gaming by roughly 7- or 8-to-1.

At the 4-star, 204-room Hemingway property Trust Hospitality will operate when it opens in roughly 18 months, non-gaming attractions will be marketed, but the hotel facility remains secondary. At such properties, life and death is intertwined with gaming operations, with the hotel a basic measure to comply with gaming regulations, and in most cases, almost purely an amenity that exists to guarantee a steady stream of gamblers.

?If this were a hotel without a casino, we?d be hard pressed to get it financed in today?s market ? But with the gaming component, large private equity firms and institutional investors see it because gaming can be a very profitable enterprise if you know how to run it,? Register said. ?I think the hotel would be successful without the casino, but the casino and the gaming component put it into a different league.?

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